microeconomics test 1
Terms
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- Economics
- how a society allocates scarce resources among essentially unlimited needs and wants.
- Microeconomics
- Originally called price theory, is the branch of economics concerned with decision-making by firms and individuals (or households) and results of those decisions. Usually, the scope is not larger than one market although one market could be large.
- Macroeconomics
- Originally called income theory, is the branch of economics concerned with the performance of the economy as a whole, including variables such as unemployment, general price levels and gross domestic product.
- The main difference between macroeconomics and microeconomics is the
- scope of analysis
- Scarcity implies
- Tradeoffs
- Opportunity cost
- the value of the next best alternative (choice) given up when making a decision.
- The reason why Economists disagree
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1. Differences in value judgements
2. Differences in scientific judgements
3. we may be unable to percieve reality due to factor in 1 & 2 - positive economics
- deals with " what is" No value judgements are made.
- Normative Economics
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deals with " what should be". Value judgements are made.
Deciding what material to cover in a course requires value judgements - Why do economists use models
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Reality can be extremely complicated
Models : analyze what happened in the past and possibly predict what will happen in the future - Economic goods
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are scarce good for which the desire to own or use them exceeds their availability at a price of zero
Examples: cars, diamonds, food - Goods
- are things that satisfy needs or wants
- Three fundamental questions each economy must answer
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1. What to produce
2. For whom to produce
3. How to produce to satisfy some wants - Factors of production
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Land- water,soil, air, plants, animals
Labor-human work
Capital- physical ( machinery etc.) and human ( knowledge, training etc.) - Law of increasing relative cost
- Opportunity Cost of other goods forgone increases as an economu produces more of a good.
- efficeiency
- getting max. production out of the resources we have or producing an amount of output at minimal cost
- absolute advantage
- when one country can produce more of all types of goods than another country
- comparative advantage
- occurs when one country can produce a good at a lower opportunity cost than another country can produce
- Law of demand
- as price per unit rises, quantity demanded falls if all else is constant
- 2 reasons why demand curve is doward sloping
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1. Affordability- Consumers can afford less at higher prices
2. Substitutability- consumers seek less expensive alternatives as the price of a good goes up. - Law of supply
- as price per unit rises, quantity supplies increases all other things equal
- 2 reasons why the supply curve is upward sloping
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1. Higher prices create incentives for greater production which could result in higher profits
2. Producing larger quantities often creats a higher per unit cost of production. As production cost rises firms must charge more to earn profit or break even. - equilibrium
- a point where no one in the market has an incentive to change his or her plans
- normal goods
- automobiles, vaction trips, homes- as income increases people tend to spend more on these goods ( vise versa )
- inferior goods
-
instant mac & cheese, ramen noodles
As income increase in many cases consumers may tendd to cut back on these goods - complementary goods
- If the price of peanut butter rises (falls), people buy less (more) jelly
- Substitutes
- If the price of cod rises (falls) people buy more (less) flounder
- Factors affecting demand
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1. Income
2. Tastes and Preferences
3.Prices of related goods
4.Number or Buyers
5.Expectations of future prices - Factors affecting supply
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1. Number of firms
2.Input Costs
3. Technology and Productivity
4. Taxes and Subsidies
5.Price expectations